Market Scramble: 'Sell' reports spark buying of some stocks

Negative feedback seen pushing companies to boost investor returns

KEITA SEKIGUCHI, Nikkei staff writer

TOKYO -- Some selling recommendations from hedge funds and brokerages have ended up lifting stocks' prices, as they served as a catalyst for the companies in question to step up share buybacks and other measures to bolster shareholder returns.

Take SMC, a major manufacturer of pneumatic and electric automation equipment. It drew buying Tuesday morning and at one point flirted with 33,230 yen -- the highest in the period going back to January 2016 -- before ending the day a tad down. SMC has gained 14% since the start of the year to far surpass a Nikkei Stock Average that has remained roughly flat.

SMC came under fire in December from Well Investments Research. The Japanese research company charged that at least 81.7 billion yen ($727 million), or a quarter of SMC's reported cash holdings, might not exist. It rated the stock a "strong sell." Yet the shares stand roughly 20% above the 26,355 yen low marked right after the report's release.

This is because SMC has launched a campaign to strengthen shareholder perks, apparently pledging to return profits in meetings with investors, which the company resumed this February. SMC reported 467.9 billion yen in cash and deposits as of the end of 2016, but its projected payout ratio for the current year ending March 31 hovers at a little over 13%. The number is a far cry from the average of roughly 30% for Japanese listed companies, meaning that it has much room to improve investor returns. Capital Research and Management is a fan, as it was learned Feb. 22 that the U.S. investment management company holds at least a 5% stake.

Another example is Itochu. After U.S.-based Glaucus Research Group California questioned the Japanese trading house's accounting practices and labeled it a "strong sell" last July, the stock tumbled more than 10% at one point.

Itochu did not take this lying down. It bought back stock in November and told analysts in an early-February conference call that it is open to different ideas on how to use cash earned this fiscal year, including repurchasing shares. Anticipation is building that the company "is likely to carry out a buyback at the end of March from the perspective of proper capital allocation," in the words of Akira Morimoto, senior analyst at SMBC Nikko Securities. Itochu shares now hover about 30% above where they were before the report's release.

Then there is Nidec, on which Muddy Waters Research is short. Nidec has more than doubled the size of its stock buyback program. Its shares are up 6% from before the U.S. research company's December report.

Other companies buffeted by recommendations to sell have been unable to lift their stock prices. Cyberdyne remains stuck in the red, while Euglena's streak of no dividend payments continues. Their weak earnings mean insufficient funds to markedly improve shareholder returns.